Unfounded Trade Secrets Claim Against Former Employees Leads To $1.6 Million Judgment

In FLIR Systems, Inc. v. Parrish, the California Court of Appeals affirmed a $1.6 million judgment in favor of the employees in a claim brought by their former employer under California’s Uniform Trade Secrets Act. The opinion can be found here. More after the break. In January 2006, two employees decided to leave their former […]

In FLIR Systems, Inc. v. Parrish, the California Court of Appeals affirmed a $1.6 million judgment in favor of the employees in a claim brought by their former employer under California’s Uniform Trade Secrets Act. The opinion can be found here. More after the break.

In January 2006, two employees decided to leave their former employer, FLIR Systems (“FLIR”), to start a new company. The employees offered FLIR an opportunity to participate in their new company, Thermicon. After FLIR rejected their offer, the employees entered into negotiations with another company, Raytheon Company (“Raytheon”). The employees had assured FLIR that they would not misappropriate any trade secrets in the operation of Thermicon. In June 2006, however, FLIR filed for injunctive relief to prevent the employees from moving forward with Thermicon based on the notion that misappropriation would inevitably result from Thermicon’s operation. As a result of the lawsuit, Raytheon terminated negotiations with the employees. Shortly after, the employees advised FLIR that they were not moving forward with Thermicon.

At trial, the court found no evidence of misappropriation or threatened misappropriation of trade secrets. Further, the court found that FLIR had brought the lawsuit in “bad faith” on a theory of “inevitable disclosure.” Under this theory, a plaintiff can prove a misappropriation claim by showing that the defendant’s new employment will inevitably lead him to rely on the plaintiff’s trade secrets. The court stated that this theory is not recognized in California based on the strong public policy in favor of employee mobility. The court proceeded to award the employees $1.6 million in costs and attorneys’ fees, and the court of appeals affirmed.

The Uniform Trade Secrets Act (“Act”) allows a prevailing party to recover costs and attorneys’ fees if a misappropriation claim is brought or maintained in “bad faith.” Although not defined in the Act, “bad faith” has been held by California courts to consist of: (1) an objective speciousness of the claim; and (2) subjective bad faith in bringing the action. On appeal from a trial court’s award of fees, the party appealing the award must show that the court abused its discretion.

The court of appeals found that the trial court’s determination under the “objective speciousness” prong, which requires a finding of lack of evidence supporting the claim, was proper. The trial court found no evidence of misappropriation or threatened misappropriation on the part of the employees, nor any evidence that FLIR had suffered economic harm. To the contrary, the court found that FLIR’s sole motive for filing the suit was to prevent Thermicon from competing with FLIR in the future. The court of appeals reiterated that employees have the right to engage in competition with their former employer, and even to compete for the same customers. The court stated that speculation of misappropriation is not sufficient grounds for an injunction, and that a plaintiff was required to show “an actual use or an actual threat.” Further, mere possession of trade secrets by an employee does not give rise to a misappropriation claim.

The court also found evidence of “subjective bad faith” on the part of FLIR under the second prong of the test. The court stated that this prong is satisfied by evidence of improper motive, harassment, or unnecessary delay. The court rejected FLIR’s assertion that a “reasonable suspicion” of potential misappropriation was sufficient to bar a finding of bad faith. The court found that the trial court’s determination that FLIR’s argument was based on an “inevitable disclosure” theory was not an abuse of discretion. The trial court also found evidence of subjective bad faith in FLIR’s failure to identify which trade secrets would be subject to the injunction. The court found that the proposed injunction was overbroad and did not give sufficient notice as to what was prohibited, and was thus an unlawful restraint on trade which constituted evidence of bad faith.

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